Recent Developments in

Permanent Establishment
Mumbai, 4 December 2009
Arvid Aage Skaar
1
The PE definition
the term permanent establishment
means a fixed place of business
through which the business of an
enterprise is wholly or partly carried enterprise is wholly or partly carried
on.
Objective Subjective Functionality
Physical -Right of use -Business
Location -Duration -Connection
2
Current discussion
R Co Customer
State R State S
Issue 1
3
R Co Customer
RCo provides services to Customer
RCo uses facilities of Customers
Does RCo have a right of use?
Current discussion (2)
Customer
State R State S
Issue 2
R Co Service provider
R Co buys a service
4
Issue (1)
Right of use or factual use?
OECD Comm art 5 no 4:
The place of business has to be owned,
rented or otherwise at the disposal of
the taxpayer the taxpayer
Factual use is not enough
What kind of legal right is required?
OECD: Pitch in a market place, customs
depot, etc
OECD: Also in other enterprises premises
5
OECD on illegal occupancy
OECD Comm art 5 no 4.1
Right of use also if the taxpayer illegally
occupies a certain location
6
OECD: The mere presence is not
enough
OECD Comm art 5 no 4.2
the mere presence does not
mean that the location is at the
disposal of that enterprise disposal of that enterprise
Example a salesman who regularly
visits a customer to take orders in
[the purchasing directors]office does
not have a right of use
7
The OECD painter example
Two years
Three days a week
Main client
Painting (core
business) business)
OECD PE
Germany No PE
8
The painter example (2)
German view:
The building is the object of the business
activity
The painter does not have a legal right of The painter does not have a legal right of
use to organize his business there
German conclusion: The right of use test
for PE is not met
9
The painter example (3)
Analysis:
Objective presence:
Fixed place of business building
Subjective presence:
Right of use ?
Duration test two years
Functionality:
Business activity painting
Business connection test in the building
10
The NATO Case
A
Contract
Cleaning of aircraft
Germany
NATO
C
B
The Netherlands
Security clearance
Limited access
NATO equipment
No office
Room with telephone,
telefax etc
11
Contract
The NATO Case (2)
Analysis (2008):
The court: the mere Ttigwerden is not enough
Objective presence:
The fixed place of business Cleaning hall
Subjective presence: Subjective presence:
Right of use test No right of use
Duration test Three years
Functionality:
Core business test Cleaning
The connection test Conducted in the hangar
12
The US Army Case
USA
Points made by the court
not only temporary right
Germany
S-Co
US Army
not only temporary right
of use
not removed without
consent
lack of exclusive right of
use
co-users consent from
time to time
13
Facts
1993-1995 (2000)
War simulation system
Data collected from exercises
50 employees
Work conducted in military buildings
Security clearance, limited access
The US Army Case (2)
Analysis (2004):
The court: the activities in the buildings were
sufficient for PE
Objective presence:
The fixed place of business Buildings The fixed place of business Buildings
Subjective presence:
Right of use test Could not be removed from the
buildings without its own consent right of use
Duration test Many years
Functionality:
War simulation Conducted in the buildings
14
The Hotel Management Case
England
Germany
P-NV
X-hotel
chain
P-KG
Ltd
Both building and rooms
inside buildings may be a
fixed place of business
All physical assets that may
serve as basis for a business
activity
Not removed without
consent
15
1985-1983; 20-year contract
Management of hotel; Serve as
general manager
Marketing activities
Supervision and control of the
business; Employments
Bookeeping and accounts
The Hotel Management Case (2)
Analysis (1993):
The court: the activities in the hotel were sufficient
for PE
Objective presence:
The fixed place of business Hotel The fixed place of business Hotel
Subjective presence:
Right of use test Manager could not be removed from
the hotel without his own consent right of use
Duration test Many years
Functionality:
Management Conducted in the hotel
16
Consultancy Case
Consultancy
firm
Client
Switzerland
Germany
17
firm
Client
Consultancy firm provides services
to Client using Clients premises
Does the Consultancy firm have a right of use?
Consultancy Case (2)
Analysis (1990):
The court: the activities in the premises of the
client were not sufficient for PE
Objective presence:
The fixed place of business Buildings The fixed place of business Buildings
Subjective presence:
Right of use test no right of use
Duration test More than a year
Functionality:
Advice/training Conducted in the buildings
18
Summary of German jurisprudence
1990 1993
2004
2008
Consultancy
Case
Hotel Mangager
Case
US Army
Case
NATO
Case
No right of use Right of use Right of use No right of use
No PE PE PE No PE
19
Insurance Agent Case
Germany
Switzerland
1979 -1989
Offshore
bank
Client
Office
Contract
Business
20
Illegal entrance into
Switzerland
No reporting to tax
authorities
2 % commission
Business
Insurance Agent Case (2)
Analysis (1995):
The court: a PE existed even though the taxpayer
was not allowed to enter Switzerland
Objective presence:
The fixed place of business Building The fixed place of business Building
Subjective presence:
Right of use test Right of use in rented offices
Duration test Several years
Functionality:
Sale of insurance Conducted in the office
21
The Knights of Columbus
Insurance Co
Authorization
Living facilities
USA
Insurance agent

Canada
Solicitation
Preliminary
insurance concluded
Solicitation
Customer
Application for
insurance to be
considered
Underwriting
Claims handling
22

The Knights of Columbus (2)

Analysis:
Objective presence:
Fixed place of business Living home
Subjective presence:
Right of use test No right of use
Duration test years
Functionality:
Business activity Solicitation
The business connection test Auxiliary
activities conducted at home (?)
23
The Dudney Case
Provision of services
USA
Canada

Individual
provided services
to company in
Canada
Used offices of
client
24
The Dudney Case (2)
Analysis:
Objective presence:
fixed place of business office building
Subjective presence:
Right of use test clients offices not enough
Duration test five days in each location
Functionality:
The business activity test conditions met
25
Service PE
OECD and UN Model Treaties
OECD Model
Performance of
services by an
enterprise through an
Individual
UN Model
Furnishing of services
through employees and
other personnel
engaged by the Individual
183 days in 12 months
50 per cent of revenue
Personnel working on
the same or connected
project
183 days in 12 months
engaged by the
enterprise for 6 months
in any 12-month period
Physical presence =
personnel
Right of use= engaged
by the enterprise
26
Service PE UN Model
Meaning of other personnel engaged
by
Inc
Employees
Hired-in-personnel
Personnel from subcontractor
Corporate personnel?
27
Other
personnel
Client
Hired-in-personnel
Contractors
Free lancers
Joint-venture personnel
Issue:
-Power to instruct?
-Responsible for the result?
Ltd
Issue (2)
Doing business through a
subcontractor
Customer
State R State S
R Co Service provider
R Co buys a service
28
The Norwegian Safe Service Case
Oil company
(Norway)
MainCo
(Sweden)
Contract
Subcontractor
Subcontract
-MainCo fully
responsible
-MainCo
subcontracts
everything
Subcontractor
(Norway)
Catering Services
on oil platform
-MainCo has no local
presence
-Subcontractor
independent
-Not a PE-case
Conclusion: MainCo conducted business in
Norway (through Subcontractor)
Simplified facts - slide from IFA Congress 2009
The Indian Power Grid Case
1/3/01 to 1/11/01:
No MainCo employees
1/11/01 to 1/7/02:
3 employees of
MainCo present
for supervision
1/10/02-
31/12/02:
MainCo
employees
to supervise
and test
1/2/03-
1/6/03:
MainCo
employees
re
warranty
1/3/01:
Preparation
begins
1/5/01:
Construction
begins.
31/12/02:
Delivery to
customer
and test
warranty
Simplified facts - slide from IFA Congress 2009
The Indian Power Grid Case (2)
State R
MAINCO
Design
Supply of equipment
Supervision of
installation
Testing of plant
State S
CLIENTCO
LOCALCO
SECURCO
Onshore
construction
&
installation
Simplified facts - slide from IFA Congress 2009
Other Recent Indian Cases
The Ship Channel Case (Pintsch
Bamag)
The Cal Dive Marine Case
Start of Construction PE Start of Construction PE
Negotiations not included
Planning and organizing the work
Onsite - included
Offsite not included?
32
Subcontractor PE
Main
Contractor
Subcontractor
State R State S
Variation 1
PE?
33
Contractor
Subcontractor
Customer
Contract
Main Contractor
4 months
Subcontractor
3 months
PE - yes
-Only for its
own business
Subcontractor PE (2)
Main
Contractor
Subcontractor
State R State S
Variation 2
PE?
34
Contractor
Subcontractor
Customer
Contract
Subcontractor
13 months
No PE
-No business
-No agency
Legal or physical presence?
Is a legal presence sufficient for PE?
The subcontractor represents the
contractor
OECD Model accepts representation in OECD Model accepts representation in
the agency clause
Requires authority to conclude contracts
Outside the agency clause: No PE
OECD Art 7: the enterprise carries
on business in the other State
35
Other cases
The French Zimmer Case (Appeal
Court, not final)
Legal presence through a
commissionaire is not sufficient for PE commissionaire is not sufficient for PE
A Belgian Case (City court, final)
Legal presence through subcontractor is
not sufficient for PE
36
Conclusions
Issue 1: A legal right of use is
required for PE under the basic rule
(unless exceptions excist, eg service
PE rule) PE rule)
Issue 2: A legal presence through a
subcontractor is not sufficient for a
PE
37
Thank you!
aas@wiersholm.no
38